Improving Ad Market Lifts All Boats Including DirecTV's

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Some TV executives are crowing about the pending boom in advertising, which we believe could not only help broadcasters and media companies like CBS ( CBS ), Viacom ( VIA ) and Disney ( DIS ) as well as satellite pay-TV providers like DirecTV ( DTV ) and Dish Network ( DISH ). Our price estimate stands at $48.63 which is roughly a premium of 7% to the market price.

A recent Reuters article states that television executives are banking on a white-hot season for advertising sales that could lift price by 10%, driven in part by a resurgence in ad sales from automakers and telecommunications companies. So we asked ourselves as the TV advertising market gains, how does DirecTV benefit?

We estimate that DirecTV's advertising division in the U.S. constitutes close to 9% of DirecTV's value . The company should be able to grow its advertising revenues significantly over next few years given the improvement in the market in general, and some other factors. Below we discuss these.

TV advertising market improvement

CBS has stated that for its program CSI:Crime Scene Investigation , advertisers have offered very attractive prices to buy last-minute ad slots. This is called scatter marketing and ad prices for this market have gone up by as much as 35% to 40% compared to the initial ad slots sold at the beginning of the season in 2010. While broadcast networks are seeing strong growth, cable networks are also benefiting. Cable network companies like Discovery Communications and Viacom have said that they are witnessing significant improvements in ad pricing as well.

According to a study by SNL Kagan in 2010, the advertising market in the U.S. was recovering and is expected to continue to grow in 2011. The research firm also mentions that while broadcasters will show the strongest growth, cable networks have been also been attracting a lot of advertisers as well.

Other factors aiding DirecTV's advertising revenue growth

Apart from general improvement, DirecTV has the opportunity to boost its advertising revenues by focusing on local advertising and interactive ads that are likely to bring it more business. In addition to this, increasing penetration of DVR should aid DirecTV's ad revenues. With DVRs, customers have the option to skip the ads which initially was a cause of concern for advertisers. However according to Nielson, about 46% of the viewers of major TV networks in the U.S. that belong to age group of 18-49 tend to avoid skipping commercials during playback on DVR. This is especially beneficial since most commercials are targeted at this age group. So rather than hurt TV's business, it seems that DVRs are helping increase TV ratings of shows that reflects in ad price increments.

You can see the complete $48.63 Trefis price estimate for DirecTV's stock.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CBS , DIS , DISH , DTV , VIA

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